Portrait, Robert Reich, 08/16/09. (photo: Perian Flaherty)

The Great Switch by the Super Rich

By Robert Reich, Robert Reich's Blog

18 May 11

orty years ago, wealthy Americans financed the US government mainly through their tax payments. Today wealthy Americans finance the government mainly by lending it money. While foreigners own most of our national debt, over 40 percent is owned by Americans - mostly the very wealthy.

This great switch by the super rich - from paying the government taxes to lending the government money - has gone almost unnoticed. But it's critical for understanding the budget predicament we're now in. And for getting out of it.

Over that four decades, tax rates on the very rich have plummeted. Between the end of World War II and 1980, the top tax bracket remained over 70 percent - and even after deductions and credits was well over 50 percent. Now it's 36 percent. As recently as the late 1980s, the capital gains rate was 35 percent. Now it's 15 percent.

Not only are rates lower now, but loopholes are bigger. 18,000 households earning more than a half-million dollars last year paid no income taxes at all. In recent years, according to the IRS, the richest 400 Americans have paid only 18 percent of their total incomes in federal income taxes. Billionaire hedge-fund and private-equity managers are allowed to treat much of their incomes as capital gains (again, at 15 percent).

Meanwhile, more and more of the nation's income and wealth have gone to the top. In the late 1970s, the top 1 percent took home 9 percent of total national income. Now the top 1 percent's take is more than 20 percent. Over the same period, the top one-tenth of one percent has tripled its share.

Wealth is even more concentrated at the top - more concentrated than at any time since the Gilded Age of the late 19th century.

So what are America's super rich doing with all this money? They're investing it all over the world, wherever they can get the best return for any given level of risk. Treasury bills - essentially loans to the US government - have proven good and safe investments, particularly during these last few tumultuous years.

You hear a lot of worries about foreigners dumping Treasuries if they lose confidence in the dollar because of our future budget deficits. What you hear less about are these super-rich Americans, who are just as likely to abandon Treasuries if spooked by future budget deficits.

The great irony is if America's super rich financed the US government the way they used to - by paying taxes rather than lending the government money - that long-term budget deficit would be far lower.

This is why a tax increase on the super rich must be part of any budget agreement. Otherwise the great switch by the super rich will make the income and wealth gap far wider.

Worse yet, average working Americans who can least afford it will either lose the services they depend on, or end up with a tax burden they cannot bear.

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Robert Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written thirteen books, including "The Work of Nations," "Locked in the Cabinet," "Supercapitalism" and his latest book, "AFTERSHOCK: The Next Economy and America's Future." His 'Marketplace' commentaries can be found on publicradio.com and iTunes.